Red Robin: Casual Dining Industry Analysis

I. The Industry, The Market and The Buyer

Competition Analysis

Total market share 37.41%

Top Competitors

Casual dining restaurants represent 16.1% of the restaurant industry’s market share (Refer

to Chart #1). Based on total system wide sales, Applebee’s Neighborhood Grill & Bar (operated

by Dine Equity Inc.) leads the segment ($4.5 billion in 2007), followed by Chili’s Grill & Bar

(operated by Brinker International; $3.9 billion in the fiscal ended June 2008) (Standard &

Poor’s, 2009). According to Business Source Premier, the following companies are the top

competitors of Red Robin Gourmet Burgers Inc: Applebee’s International, Inc. with 14.69% of

market share, The Cheesecake Factory Incorporated with 3.68% of market share, California

Pizza Kitchen, Inc. with 1.74% of market share, and Ruby Tuesday, Inc with 5.84% of market

share (May 2008). However, according to Hoovers Company Records, Red Robin’s top

competitors are: Brinker International (Chili’s with 11.46% market share), California Pizza

Kitchen Inc. (1.74%), and Ruby Tuesday (5.84%) (2008). Red Robin’s market share is given as

2.80% in Table Base (June 2006) (See Chart #2).

Brinker

Brinker International is among the “best quality casual dining restaurants” in the world.

Brinker has “founded its strategies on the strong position of its world-class brands in order to be

able to increase the sales of its restaurants and diversify its operations into new markets.” In

addition, Brinker implements market strategies in which they offer great value products in order

to lure customers to their restaurants. Brinker also uses a number of strategies to continue its

steady growth such as franchising, joint venture, and company-owned development

 Red Robin: Casual Dining Industry Analysis

(Datamonitor, 2008). In developing franchise agreements, Brinker International has been able to

emerge into new markets and expand in existing ones.

California Pizza Kitchen

California Pizza Kitchen has a broad product portfolio providing customers with a wide

range of good quality choices. The menu offers different kinds of pizza and salads for different

tastes. California Pizza Kitchen holds a “strong top line growth driven by domestic and

international franchise agreements” (Datamonitor, 2008).

Ruby Tuesday

Ruby Tuesday tries to appeal to consumers with a “broad selection of menu items and mid-

range prices. Ruby Tuesday relies heavily on television and print advertising to promote its brand

and distinguish itself from other chains such as Applebee's.” The company “continues to add

premium items to its menu as part of on-going effort to update the Ruby Tuesday brand”

(Hoovers, 2008).

Applebee’s

Applebee’s has been undergoing a “radical change in their business model under the

ownership of DineEquity.” The chain has also been “increasing its marketing and menu

development efforts to attract the attention of the dining public” (Hoovers, 2008). “Applebee’s

strategy is to create a brand image that positions the restaurant chain as a place for family, friends

and coworkers to reconnect and to differentiate the chain from the myriad of other casual dining

chains available to consumers” (Gunelius, 2007).

The Cheesecake Factory

The Cheesecake Factory is one of the “largest growing menu categories in the US

restaurant industry.” They open restaurants in attractive locations, populated areas and above-
 Red Robin: Casual Dining Industry Analysis

average income households, for example shopping malls (Datamonitor, 2008). The Cheesecake

Factory doesn’t advertise in the traditional sense, they rely heavily on marketing and public

relations efforts. “We create experience, word-of-mouth, and a great location with easy access.”

Howard Gordon, Senior Vice-president of Business Development and Marketing stands firm, “If

there’s not good service, they don’t come back. I do not care how many ads you run” (Price,

2004).

Driving Forces

Technology

Technology is the newest and most important driving force in the family/casual dining

industry as “more and more operators move to online ordering and email and text based

marketing” (Slawsky, 2009). As of late, many casual dining operators have implemented

programs allowing users to place an order online for pick up or delivery, including taking online

payments. Some of these programs even provide incentive to placing an order online. By

merging towards email and text based marketing, operators are getting their customers involved

through online savings coupons, e-clubs, and loyalty rewards programs. One major implication

of the use of technology in the casual/ family dining industry is that companies can better track

the usage and preferences of their customers, providing invaluable data that will further bolster

the marketing and distribution efforts of these companies.

Convenience

Convenience in the casual dining industry is imperative to the success of the industry as a

whole. Without the given convenience in the act of dining at a casual dining restaurant, there

would be no point in eating out at a casual dining restaurant at all. In order to provide some

semblance of how important convenience is to the consumer, many restaurants have been
 Red Robin: Casual Dining Industry Analysis

“forced to implement curbside programs just to survive”, according to QSR Magazine.com

(2007), the leader in quick-service and fast-casual news. Curbside provides an added benefit to

casual diners, given that one can simply call in or get online to place an order, which they may

pick up curbside in a matter of minutes. According to the NRA (National Restaurant

Association), “more than 20% of adults indicated the order more takeout from table-service

restaurants than they did two years ago” (Minnick, 2007). Convenience as a driving force

certainly acts as a buffer for the casual dining industry by ensuring the continued success and

longevity of the industry as a whole.

The Economy

The most obvious driving force of the casual dining industry is America's current

economic situation. Economy and Politics Examiner Sahit Muja (2009) discusses the

implications of the U.S. Economic crisis on the restaurant industry, attributing rising gas and

food prices, increased competition and ill-timed expansion as a hindrance to profits. Decreased

consumer spending and elevated food costs are also factors affecting the casual dining industry's

success in today's U.S. Economy. Efforts such as the aforementioned curbside service provided

by many casual dining restaurants and restaurant loyalty programs have attempted to level out

PPA (per person average), sales, and profit goals for some companies. Unfortunately, a waiting

game is ensued in the turning around of the U.S.' economic situation. Until then, perhaps of all

segments of the restaurant industry, the “casual dining industry will be the hardest hit” according

to global rating agency Fitch Ratings, projecting a third year of negative same- store sales

(Hartford, 2008).

Key Success Factors

“Key Success Factors are those functions, activities or business practices, defined by the
 Red Robin: Casual Dining Industry Analysis

market and as viewed by the customers, which are critical to the vendor/customer relationship.

Key Success Factors are defined by the market and by the customer, not by the company.” (Dix

& Mathews, 2002) In order for a factor to be successful it must produce significant customer

value and market differentiating value. When choosing their strategies, a company needs to

know what drives the market and what the customers need and want.

Product Design

Product design alongside high product quality is a development designed to optimize the

value and appearance of the food that is offered at casual dining restaurants (Lloyd, 2009).

Companies start with the idea that the product is a bundle of benefits to a particular target

market. They then do a detailed study to identify the specific benefits the group is seeking and

develop an offer that combines these benefits. The detail that is given to each meal order

guarantees the staff and the customer mutual benefit and builds a sustainable relationship

between the two.

Team

Another key success factor is assembling a team that is motivated to personally sell the

product at hand. Restaurant’s employees need to be knowledgeable about the brand and product

offering in order to properly inform each and every customer that arrives for a casual dining

experience. “A positive attitude and professional behavior with regard to performance should be

emphasized.” (Lloyd, 2009)

Mascot

Mascots create an identity for companies as a whole, therefore making them a key

success factor. “Customers see the mascot in advertisements and link it to the product and
 Red Robin: Casual Dining Industry Analysis

restaurant itself, ultimately creating brand awareness” (Nutt 2009). In retail, mascots are a

positive influence on sales because they create media exposure and excitement which generally

leads to sales. Mascots generate interest and emotional response in children, thus making parents

more apt to choose one restaurant over another.

In order for casual dining restaurants to continually perform well and achieve their

mission and objectives, they need to constantly exert their success factors. These factors are

absolutely critical to the success of any company. “By identifying and communicating key

success factors throughout the company, it helps ensure that everyone is well-focused while also

avoiding wasteful efforts” (Hambrick, 1989). As key success factors are related to the industry

as a whole, in order for a company to surpass their competition they need to build on the

strengths of their restaurant through the use of these factors.

Industry Attractiveness

Michael Porter’s Five Forces Model consists of the sub-segments supplier power, buyer’s

power, competitive rivalry, threat of substitutes, and threat of new entrants. Beyond an in-depth

discussion of the preceding subjects, a weight and ranking are also assigned to each to signify

their importance to the overall industry attractiveness. The ranking will be within the range 0-1,

with 0 having no influence and therefore very attractive and 1 having complete control and

therefore very unattractive.

Supplier Power

Overall supplier power is the weakest of all in the Five Forces Model because there are

many suppliers of various commodities necessary to the casual dining industry, none of which is

unique in nature. Of course, supplier power is somewhat relative depending on the geographic

location of the restaurant and its proximity to a supplier, inevitably effecting cost. Industry
 Red Robin: Casual Dining Industry Analysis

dependent agricultural products and their suppliers are very common with their prices staying

relatively stable from year to year. Hedge contracts guaranteeing a restaurant’s business for

usually one year provides a small amount of power not common in agricultural suppliers,

although somewhat increasing switching costs. The forces of labor supply are also quite weak

given the current state of the economy, but this force will probably gain some strength as the

unemployment rate declines. Overall, this force does not play much of a role in regards to

supplier’s power.

The real estate supplying forces that most in the industry are dependent upon for

expansion are more complicated than the others and therefore hold more power. Most chain

restaurants prefer to build their own facilities so that they conform to design and concept,

although the land it’s built on can be either leased or bought. Purchasing the property is a greater

upfront cost, but eliminates a leasee from holding power by charging and/or raising a monthly

rent. The size of the corporation within the industry is also of consideration because economies

of scale can be established and larger firms could potentially turn the tables and dictate terms to

suppliers. Taking all of these major supplying forces into consideration, overall supplier’s power

will be ranked as .10 out of 1 (S&P, 2008).

Buyer Power

Buyer power is stronger than supplier power, but for the most part buyers do not poses

enough collective power to have much impact on driving prices down. In the casual dining

industry buyers are ordinary citizens, so no one buyer or group of buyers purchase a significant

amount of the industries products, and therefore cannot dictate price or terms. On the other hand;

buyers possess more power than suppliers because fixed costs in the industry are so high and in

significant numbers buyers can affect sales and profitability. The U.S. has seen a steady growth
 Red Robin: Casual Dining Industry Analysis

in home meal replacement (HMR) for quite a while due to growth in disposable income,

declining free time, and possibly cultural factors. This growth has come to a head as consumers

have less disposable income in a contracting economy with rising unemployment rates. The

industry’s dependence on these macroeconomic factors inevitably puts some power into the

hands of their buyers, giving them a rating of .13 out of 1 (S&P, 2008).

Competitive Rivalry

This force is rated relatively high and the second highest overall because the casual

dining industry is highly competitive. Restaurant chains are no longer just in urban and

metropolitan areas; they need a substantial flow of customers, but those numbers can be found in

even less populated areas today. Not only is the density of restaurants high, the products and

services offered are also similar and under constant scrutiny of consumers, leading them to seek

out and frequent those that offer the best value. Larger restaurants possess a slight advantage

over others in that they have economies of scale which allow them to advertise more frequently,

develop new and unique products, and gain access to competitive technology. Overall, this force

is rated .25 out of 1 (S&P, 2008).

Threat of Substitutes

This force is the highest of the five because of the frequency of substitutes. Furthermore,

substitutes for casual dining are not inclusive to this industry alone, but can be any form of

HMR, as well as meals prepared at home. Often restaurants have to use a differentiation strategy

and/or rely on atmosphere in order to provide a product that is not quite as duplicable. This force

receives .30 out of 1 (S&P, 2008).

Threat of New Entry

The entry barriers to this industry are pretty low with 91% of all restaurants being run by
 Red Robin: Casual Dining Industry Analysis

small operators according to the National Restaurant Association (S&P, 2008). Intense

competition and high fixed costs are deterrents, but many entrepreneurs enter because a high

percentage of incremental sales past the breakeven point can become profit. The restaurant

industry is also one of the most franchised industries, so new entrants are common phenomena.

On the other hand, larger chain restaurants enjoy economies of scale, advertising, better

technology, and more know how in real estate purchasing, but given that this analysis is a

compilation of the industry as a whole, threat of new entry is rated as .22 out of 1 (S&P, 2008).

Market Segmentation Analysis for Red Robin Gourmet Burgers

Education

According to Mediamark Reporter there are approximately 58,543,000 college graduates

in the 48 contiguous United States, making them a substantial market worthy of consideration.

Mediamark reports that customers of the casual dining industry are 12% more likely to have

graduated college than the general population. 80.9% and 75.6% were respectively in the

college graduates plus and attended college classifications. As the level of education increases,

so too does the percentage of customers to the casual dining industry; therefore, indicating a

positive relationship (See Chart #3).

Adult Age

According to Mediamark the index of likely customers regardless of age seems to be

relatively stable across all age classifications. The casual dining industry has age demographics

25 to 34 and 35 to 44 as the most likely of customers, with both tied at only 2% being more

likely than the general population. Mediamark’s data indicates that age does not play a major

role in the visiting patterns of their customers; however, those that would be considered middle-

aged (classifications 25-34, 35-44, and 45-54) do maintain slightly higher percentages than those
 Red Robin: Casual Dining Industry Analysis

younger or older (See Chart #4).

Gender

Mediamark reports that women are at least 4% more likely customers of the casual dining

industry and one category, women between ages 18-34 are as much as 5% more likely of

customers than the general population. Despite these figures, the makeup of women as a whole

of customers to the industry is only slightly higher than that of males. Women 18 to 49 lead the

pack at 31.4% of total customers while men in the same age category are slightly less at 29.4%

of total customers (See Table #1).

Income

The casual dining industry seems to draw the majority of its customers from higher

income brackets. Mediamark has those who make over $150,000 and those who make between

$75,000 and $149,000 tied at 14% more likely of customers than the general population. The

category of those making between $75,000 and $149,999 have a significant lead over all other

household income (HHI) brackets, making up 30.6% of total customers. The next closest

category is those who have HHI between $60,000 and $74,999 and make up a mere 11.8% (See

Chart #5).

Marital Status

Being married seems to be the most important demographic factor influencing customers

of the casual dining industry. Those who are married are 5% more likely to be customers than

the general population and make up 59% of customers. The next closest marital status

classification is never married, coming in at 23.9% of total customers. No other marital status

classification even comes close to the 59% of those customers who are married (See Chart #6).

Age of Child
 Red Robin: Casual Dining Industry Analysis

Mediamark does not collect information on the family size or the number of children in

the household, but does collect the likelihood and percentages of casual dining restaurants having

children as customers between particular ages. Younger children who are six years or more and

under the age of 18 are the most common customers in the child age category. The 12 to 17

category leads with 20% of all children customers, but all categories are relatively even until the

child is younger than two years when the total percentages drop off significantly (See Table #2).

Race

As would be expected, Caucasian (white) is the most likely race of customers to frequent

the entire casual dining industry, being 3% more likely than the general population. The white

demographic makes up 78.5% of all races who are customers, while the black demographic

makes up the next highest at 10.4% (See Chart #7). Many restaurants are trying to diversify their

menus to satisfy new emerging markets. For example, the Hispanic market has become important

to the restaurant industry and this segment is expected to rise to 25% of the population by 2050

(S&P, 2009).

Buyer Description

According to a 2007 study conducted by Barrington, Ill.-based Sandelman & Associates

and published by Chicago-based Technomic Inc., “males between 45 and 64 are the heavy users

of casual dining restaurants with a household income of $75,000 or higher.” (See Charts #8 &

#9) “Although these consumers continued to visit chains and independents, all other income

groups cut back during the quarter ended February 2007.” The NPD Group attributes the cutback

on visits to casual Dinnerhouses “primarily to economic factors, including rising gas prices and

the increasing number of low to mid-income households defaulting on sub-prime mortgage”

(Lebhar-Friedman, 2007). New American Diner Study data also confirm that 22.5% of high-
 Red Robin: Casual Dining Industry Analysis

income consumers use casual-dining restaurants once a week or more (Hume, 2007). Consumers

expect freshness, acceptable temperature of food, and value for the money; all critical factors at

casual dining restaurants (Business Wire, 2007).

Quantification Statistics

Chart #1

Restaurant Market Shares – 2007 (S&P, 2009)

16.00% Chart #2
14.69%
14.00%

12.00% 11.46%

10.00%
Dec-05
8.00%
Jun-06
5.84%
6.00% May-06

3.68%
4.00%
2.80%
1.74%
2.00%

0.00%
Applebee's Chili's Cheesecake Red Robin California Ruby
Factory Pizza Kitchen Tuesdays

Casual Dining Market Share Competitors based on

Annual Sales- 2006 Lebhar-Friedman Inc.
 Red Robin: Casual Dining Industry Analysis

Chart #3 Education graduated Age of Adults Chart #4

college
plus
19%
65+ 18-24
15% 13%
no college
28% 55-64 25-34
15% 18%
post attended
graduate college
6% 19%
45-54 35-44
did not graduated 20% 19%
graduate high
HS school
8% 20%

Table 1: Gender*

Stub Total '000 Proj '000 Pct Across Pct Down Index
Men 18-34 34,507 24,152 70.0 14.9 97
Men 18-49 66,845 47,495 71.1 29.4 98
Men 25-54 62,602 44,460 71.0 27.5 98
Women 18-34 34,053 25,890 76.0 16.0 105
Women 18-49 67,388 50,778 75.4 31.4 104
Women 25-54 63,999 48,214 75.3 29.8 104
*See attachment for table reading instructions

Household Income Marital Status

$20,000-
$29,999
Chart #5 Chart #6
9%
< $
$30,000- Widowed
$20,000 150,000+ Never
$39,999 /Divorced
10% 11% Engaged Married
9% 16%
4% 23%

$75,000-
$149,999
31%
Now
$40,000- Married
$49,999 57%
$50,000- $60,000-
9%
$59,999 $74,999
9% 12%
 Red Robin: Casual Dining Industry Analysis

Age of Children: Table #2*

Stub Total '000 Proj '000 Pct Across Pct Down Index
Child age: <12 months 10,440 6,748 64.6 4.2 89
Child age: 12-23 months 8,780 6,558 74.7 4.1 103
Child age: <2 years 18,764 12,935 68.9 8.0 95
Child age: <6 years 44,047 31,458 71.4 19.5 99
Child age: 2-5 years 33,622 24,238 72.1 15.0 100
Child age: 6-11 years 41,841 29,939 71.6 18.5 99
Child age: 12-17 years 44,714 32,269 72.2 20.0 100
*See attachment for table reading instructions

Race
Other
America Asian 8%
n Indian 3%
1%
Black
10%

White
78%

Chart #7

Chart #8 Chart #9
 Red Robin: Casual Dining Industry Analysis

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